Using a discretionary trust to cut your inheritance tax

Using a discretionary trust to cut your inheritance tax: we know your family are the most important people in your life - so when the time comes to pass on your assets to them, it's a good idea to consider ways to minimise the amount they could lose in inheritance tax.

One of the most effective ways to do this is by using a trust fund, thereby entrusting your assets to somebody else on behalf of the beneficiary - meaning they're no longer in your possession and are unlikely to be subject to inheritance tax. Coddan Formations Agency can help, providing expert advice and a one-stop service to set up the arrangement.

We've shared some guidance below on how discretionary trust funds work and how you can ensure that the people you love are provided for.

What is a trust fund? It's a legal arrangement in which your assets - be it cash, property or investments - are looked after by someone else who manages them responsibly until the point at which you arrange for them to be passed on to the beneficiary.

For example, you might wish for a lump sum to be passed on to your child when they turn 21, or for regular payments to be made to them after a certain date.

How do they work? They can work in several different ways depending on which type of trust you choose. A 'bare trust' is the simplest option, from which the beneficiary receives all the assets immediately (provided they're over 18).

An 'interest in possession trust', meanwhile, allows the beneficiary to take a regular income from the trust but they cannot access it in its entirety. Income tax will usually be due in this kind of arrangement. A discretionary trust gives full control of the assets to the trustees, who might, for example, be the parents of your grandchildren, while a mixed trust allows for these options to be combined.

How can you set up a trust fund? First and foremost, the trust's wording must be exact, so you need to seek legal support. Coddan Formations Agency can help with this. Next you need to nominate your trustees.

They need to be people you can rely on - perhaps family or close friends - and you should ensure that they're happy to take on the responsibility. Or, if that isn't suitable, you could appoint a bank or solicitor as trustee for a fee.